Lead Plaintiff Opposes Dismissal of Class Action Against Eaton Corp.

IV. CONCLUSION

TABLE OF AUTHORITIES

Cases

In re Ashanti Goldfields Sec. Litig., 2004 WL 626810 (E.D.N.Y. Mar. 30, 2004)

Basic Inc. v. Levinson, 485 U.S. 224 (1988)

Carpenters Pension Tr. Fund of St. Louis v. Barclays PLC, 750 F.3d 227 (2d Cir. 2014)

Castellano v. Young & Rubicam, Inc., 257 F.3d 171 (2d Cir. 2001)

Christine Asia Co. v. Ma, 2017 WL 6003340 (2d Cir. Dec. 5, 2017)

City of Royal Oak Ret. Sys. v. Juniper Networks, Inc., 2013 WL 2156358 (N.D. Cal. May 17, 2013)

Corp. Prop. Assocs. 14 Inc. v. CHR Holding Corp., 2008 WL 963048 (Del. Ch. Apr. 10, 2008)

Customer Sec. Litig., 2007 WL 2694469 (S.D.N.Y. Sept. 13, 2007)

In re Enron Corp. Sec., Derivative & ERISA Litig., 235 F. Supp. 2d 549 (S.D. Tex. 2002)

Fogel v. Wal-Mart de Mexico SAB de CV, 2017 WL 751155 (S.D.N.Y. Feb. 27, 2017)

In re Francesca's Holdings Corp. Sec. Litig., 2015 WL 1600464 (S.D.N.Y. Mar. 31, 2015)

Fresno Cty. Emps.' Ret. Ass'n v. comScore Inc., 2017 WL 3261609 (S.D.N.Y. July 28, 2017)

Freudenberg v. E*Trade Fin. Corp., 712 F. Supp. 2d 171 (S.D.N.Y. 2010)

Ganino v. Citizens Utilities Co., 228 F.3d 154 (2d Cir. 2000)

In re Gilat Satellite Networks, Ltd., 2005 WL 2277476 (E.D.N.Y. Sept. 19, 2005)

Goetz v. Hershman, 2010 WL 2813497 (S.D.N.Y. July 15, 2010)

Inst. Inv'rs Grp. v. Avaya, Inc., 564 F.3d 242 (3d Cir. 2009)

Lapin v. Goldman Sachs Grp., 506 F. Supp. 2d 221 (S.D.N.Y. 2006)

Lattanzio v. Deloitte & Touche LLP, 476 F.3d 147 (2d Cir. 2007)

McMahan & Co. v. Wherehouse Entm't, Inc., 900 F.2d 576 (2d Cir. 1990)

McPhail v. First Command Fin. Planning, Inc., 247 F.R.D. 598 (S.D. Cal. 2007)

Meyer v. Jinkosolar Holdings Co., 761 F.3d 245 (2d Cir. 2014)

Novak v. Kosaks, 216 F.3d 300 (2d Cir. 2000)

Operating Local 649 Annuity Tr. Fund v. Smith Barney Fund Mgmt. LLC, 595 F.3d 86 (2d Cir. 2010)

In re Platinum and Palladium Antitrust Litig., 2017 WL 1169626 (S.D.N.Y. Mar. 28, 2017)

In re Refco, Inc. Sec. Litig, 503 F. Supp. 2d 611 (S.D.N.Y. 2007)

In re Resonant Inc. Sec. Litig., 2016 WL 6603953 (C.D. Cal. Sept. 6, 2016)

Richman v. Goldman Sachs Grp., 868 F. Supp. 2d 261 (S.D.N.Y. 2012)

Ross v. Warner, 80 F.R.D. 88 (S.D.N.Y. 1978)

In re Salix Pharm., Ltd., 2016 WL 1629341 (S.D.N.Y. Apr. 22, 2016)

In re Scholastic Corp. Sec. Litig., 252 F.3d 63 (2d Cir. 2001)

Siegel v. Converters Transp., Inc., 714 F.2d 213 (2d Cir. 1983)

Slayton v. Am. Express Co., 460 F.3d 215 (2d Cir. 2006)

Stevelman v. Alias Research Inc., 174 F.3d 79 (2d Cir. 1999)

Teamsters Local 445 Freight Div. Pension Fund v. Bombardier Inc., 2005 WL 2148919 (S.D.N.Y. Sept. 6, 2005)

Tellabs, Inc. v. Makor Issues & Rights Ltd., 551 U.S. 308 (2007)

In re Vivendi, S.A. Sec. Litig., 838 F.3d 223 (2d Cir. 2016)

Wilder v. News Corp., 2016 WL 5231819 (S.D.N.Y. Sept. 21, 2016)

Yourish v. Cal. Amplifier, 191 F.3d 983 (9th Cir. 1999)

In re Zyprexa Prod. Liab. Litig., 549 F. Supp. 2d 496 (E.D.N.Y. 2008)

Rules

Rule 15(c)(1)(B)

Other Authorities

2 Louis Loss, Joel Seligman, & Troy Paredes, Fundamentals of Securities Regulation (6th ed. 2011)

3 Thomas Lee Hazen, Treatise on the Law of Securities Regulation, § 12:68 (7th ed. 2016)

5C Arnold S. Jacobs, Disclosure and Remedies Under Securities Laws § 12:77 (2017)

6 C. Wright & A. Miller, Fed. Prac. & Proc. Civ. § 1471 (3d ed.)

7A C. Wright & A. Miller,Fed. Prac. & Proc. Civ. § 1760A (April 2016 update)24 Black's Law Dictionary (10th ed. 2014)

Brief for Plaintiffs-Appellants, Slayton v. Am. Empress Co., 2004 WL 5251002 (2d Cir. Aug. 23, 2004)

Brief for Defendants-Appellees, Stevelman v. Alias Research Inc., 1998 WL 35155442 (2d Cir. Apr. 8, 1998)

---

Lead Plaintiff South Carolina Retirement Systems Group Trust respectfully submits this memorandum of law opposing Defendants' Motion to Dismiss (“Def. Br.,” ECF No. 88) the Second Amended Consolidated Class Action Complaint (“SAC,” ECF No. 82) (cited as “¶ _.”).

I. INTRODUCTION AND FACTUAL BACKGROUND

Defendants argue that the SAC adds nothing of substance to the first Consolidated Class Action Complaint (the “FAC,” ECF No. 51), and therefore should be dismissed on the same grounds — i.e., it does not allege material falsity or scienter, and it cannot relate back to the Initial Complaint (ECF No. 1) under Rule 15(c) and so cannot expand its class period of November 13, 2013 - July 28, 2014 (the “Original Class Period”). Def. Br. at 1-3. Not so. The SAC adds numerous allegations that directly address the reasons for the Court's dismissal of the FAC.

First, the SAC cures the relation back problem discussed by the Court in its dismissal Order (the “Order,” ECF No. 69, at 11-17) by narrowing the Class definition to exclude any new class members that the Court held to be “parties.” ¶ 1 & n.1. Because the SAC no longer adds any new parties, Rule 15(c)(1)(C) and its “mistake” requirement do not apply.¹

Second, the SAC adds many allegations that cure the FAC's purported merits deficiencies.

As a preliminary matter, this case is not about whether a sale or spin-off of Eaton's Vehicle division during the Class Period (May 21, 2012 – July 28, 2014) was theoretically possible, prohibited by law, or planned by the Company, as Defendants try to frame it. E.g., Def. Br. at 7-10, 13. Rather, the key issue is whether Defendants misled investors by repeatedly answering analysts' and investors' questions about divesting Eaton's Vehicle business with misleading half-truths that created the false impression that, although there were no current plans to divest, there were also no current constraints against such a divestiture. In fact, there was a huge, five-year tax constraint (which expired on December 1, 2017) making it economically unfeasible during the Class Period.² This tax constraint was an existing fact known to Defendants during the Class Period, rather than a future contingent event that may or may not happen; thus, the balancing test for the materiality of merger discussions and other such contingent events is inapplicable.

The materiality of such information is shown by analysts' and investors' repeated questions to Defendants about any such “constrain[ts],” including specifically “tax issue[s]” (¶ 145), and Eaton's “ability to divest the business,” despite Defendants' denials of any current “plan” to do so (¶ 129). Such questions arose in the context of Eaton's evolution from a vehicle parts manufacturer into an electrical parts manufacturer. ¶¶ 2-4. Thus, the Vehicle business was viewed by the market as “non-core” (¶ 115) and its divestiture as a “final step” (¶ 139) in Eaton's evolution.

Its materiality is further reinforced by Eaton's 8% stock drop on the corrective disclosure — its largest stock drop in 6 years (another new allegation in the SAC, ¶ 173) — which erased nearly $3 billion of its market capitalization. Numerous analysts attributed Eaton's stock “hit” directly to, as newly alleged, Defendants' “clarity on inability to spin off vehicle business . . . given the immense tax inefficiency,” a constraint understood to mean that this “prospect . . . clearly remains off the table through 2017.” ¶ 179; ¶ 181 (Wells Fargo attributing 8% “sell-off” to an “announced inability to spin-off businesses for the next five years,” another new allegation); ¶¶ 174-86.

Additionally, new allegations show that Defendants' statements implying that Eaton was unconstrained in its “ability to divest” this non-core Vehicle business (¶ 128) materially misled investors, notwithstanding Defendants' denials of current plans to do so. See also ¶ 153 (Defendant Fearon misleadingly assuring that Eaton “can act” “when the opportunity naturally arises for [such] a transaction . . . [i]f we believe that a business is better owned by somebody else”). For example, the SAC adds new allegations from a June 4, 2012 Crain's Cleveland Business report to show that Defendants' half-true denials created a materially misleading impression: In discussing Defendant Cutler's response to an analyst's question about whether investors “should expect more portfolio evolution,” i.e. a divestiture of the Vehicle business, Crain's concluded that Cutler's denial “isn't a full-fledged no.” ¶¶ 100-102. Indeed, throughout the Class Period, Defendants never gave analysts “a full-fledged no” (¶ 102) when they asked about the Company's ability to divest its Vehicle division, even though they knew that the analysts and investors continued to believe that Eaton had no constraints against doing so and that the divestiture made sense in light of Eaton's transformation into a company focused on manufacturing electrical products.

Likewise, new allegations from a July 14, 2014 Morgan Stanley report discussed the alleged misstatements wherein “management has stated that while the Cooper transaction does not have any covenants that prevent it from taking any further strategic actions, it currently has no plans,” and concluded that Eaton maintained the “possibility of a Vehicle spin . . . [that] could be a powerful catalyst for” its stock. ¶ 159. Again, analysts believed in this “possibility” for one reason: Defendants intentionally created that false impression by studiously avoiding telling the market the whole truth.

These and similar new allegations, of analysts and other market participants hearing Defendants' denials as leaving open the possibility for a tax-free spin in the future, further strengthen Plaintiff's falsity, materiality and scienter arguments. That so many analysts all understood Eaton's statements to mean that it was unconstrained in divesting strengthens the inference that Defendants intentionally or recklessly encouraged that false belief.

Defendants' argument that a divestiture was theoretically possible and merely “expensive” or “costly” (Def. Br. at 2, 4, 11, 12) is also undermined by the above new allegations that the market understood their corrective disclosures to effectively bar divestiture until late 2017. This argument, and Defendants' refrain that their statements were not “incorrect” or outright “false” (Def. Br. at 10), ignores well-established Second Circuit law that falsity is not measured by literal truth. See In re Vivendi, S.A. Sec. Litig., 838 F.3d 223, 240 (2d Cir. 2016) (“so-called half-truths — literally true statements that create a materially misleading impression — will support claims for securities fraud”); Freudenberg v. E*Trade Fin. Corp., 712 F. Supp. 2d 171, 180 (S.D.N.Y. 2010) (“A statement is misleading if a reasonable investor would have received a false impression from [it].”).

Further, the SAC adds allegations based on two experts' analyses showing that a taxable sale or spin-off of Eaton's Vehicle division during the Class Period would have been economically unfeasible, rather than simply “expensive.” First, Plaintiff's tax expert quantified the tax liability on such a sale as up to 35% of the sale price, or potentially more than $2 billion. ¶¶ 74-76.

Second, Plaintiff's investment banking expert, James Miller, explained that a taxable sale of Eaton's Vehicle division would have effectively reduced the value of the Company by 16.7% ($4.6 billion in market capitalization), compared to its value in a tax-free spin-off. ¶¶ 77-81. Mr. Miller's analysis and conclusion were similar to one in a Jefferies analyst report during the Class Period, another new allegation in the SAC. ¶¶ 69-72. As a result, Mr. Miller concluded that a reasonable investment banker would not have recommended a taxable sale of Eaton's Vehicle Business during the Class Period. ¶¶ 82-85. These allegations further support the materiality of the omitted information about Eaton's inability to conduct a tax-free spin-off.

The SAC also alleges five new misstatements based on Defendants' denials of any current plans or intent to divest the Vehicle business. ¶¶ 190, 204, 207, 213, & 215. These denials were themselves misleading half-truths and thus do not render Defendants' other statements immaterial or discharge their duty to disclose the tax constraint on such a divestiture. The market continued to wrongly believe that a tax-free spin-off remained a “viable option” despite such denials. ¶¶ 113-115.

Moreover, these new misstatements further strengthen the falsity and scienter allegations by showing a consistent, long-running pattern of behavior that cannot be explained by mere happenstance or negligence. The SAC alleges ten misleading statements, most of which are in response to direct questions about any tax-related constraints on Eaton's ability to divest the Vehicle business post-Merger (or similar language). That is not a series of unconnected mistakes. It is a pattern showing intentional or at least severely reckless behavior.

Finally, the SAC adds an additional disclosure by Fearon on July 29, 2014, the end of the Class Period, that a spin-off was “difficult to make work economically” given the resulting high tax liability. ¶ 170. He thus admitted that the tax liability rendered the spin-off economically unworkable, rather than simply more expensive, which Defendants acknowledged they knew “all along” based on their own internal analysis that was “corroborated” by “several outside advisors.” ¶¶ 167-68. This newly alleged admission directly contradicts Defendants' prior misstatements that nothing, including specifically “tax” considerations from the Merger, “constrained,” “restrict[ed],” or “prevent[ed]” Eaton from divesting the Vehicle business during the Class Period. ¶¶ 190, 201, 204, & 209. Therefore, this new statement by Fearon strengthens both falsity and scienter.

These and other changes in the SAC fully address all of the issues raised by the Order.³ Therefore, Defendants' motion must be denied.

II. LEGAL STANDARDS

On a motion to dismiss under Rule 12(b)(6), “courts must . . . accept all factual allegations in the complaint as true.” Tellabs, Inc. v. Makor Issues & Rights Ltd., 551 U.S. 308, 322 (2007); see also Christine Asia Co. v. Ma, 2017 WL 6003340, at *2 (2d Cir. Dec. 5, 2017) (courts must “credit significant allegations on which Plaintiffs' claims relied[,] . . . treat the complaint in the light most favorable to the Plaintiffs, and [ ] draw reasonable inferences in the Plaintiffs' favor”).

III. ARGUMENT

A. The SAC's New Allegations, When Viewed Together with Prior Allegations, State a Claim Under Section 10(b) of the Exchange Act

Ignoring the allegations of a known, existing tax constraint, the Court held that in light of Defendants' denials of plans to divest the Vehicle business, “the theoretical tax consequences of a hypothetical transaction that was never planned and never occurred is not material, and the defendants were under no duty to disclose them.” Order at 25-26. Defendants assert that the SAC alleges “the exact same theory” of falsity that the Court has already rejected. Def. Br. at 7-8.

Although the SAC is premised on the same general falsity theory, that does not mean it should be dismissed because it provides significant new factual allegations showing why Defendants' statements were materially misleading.

1. New Factual Allegations Based on Analyst and News Reports Support Materiality and Defendants' Duty to Disclose

a. Analyst and News Reports Show that Defendants' Denials Did Not Render the Omission Immaterial or Discharge Their Duty to Disclose

The SAC addresses the Court's materiality ruling by alleging additional analyst reports and statements from a news article that discussed Eaton's continued ability to divest the Vehicle business as a valuable option in the near-term, despite Defendants' purported denials of any current plans to divest it. Such a divestiture was critical to analysts and investors after the Merger because of the Company's shift away from the vehicle parts manufacturing business, its high debt level post-Merger, and its settlement of a large antitrust lawsuit against its Vehicle business brought by a competitor, Meritor. ¶¶ 4-8, 155. Indeed, many analyst and news reports incorporated Defendants' misstatements into their investment theses, establishing that the information was material to a reasonable investor. See In re Scholastic Corp. Sec. Litig., 252 F.3d 63, 76 (2d Cir. 2001) (omitted information was material based on allegations that analyst “boosted its rating of Scholastic stock . . . based upon [relevant] representations from the company”).

For example, new allegations based on a June 4, 2012 Crain's Cleveland Business report show that Defendants' half-true denials of current divestment plans created a materially misleading impression. Specifically, the article discussed Cutler's response of “no plans” to currently sell or spin-off the Vehicle business to an analyst's question whether investors “[s]hould [ ] expect more portfolio evolution” on the May 21, 2012 call (Misstatement No. 1, ¶ 188). The article concluded that Cutler's answer “isn't a full-fledged no.” ¶¶ 100, 102. Moreover, despite Cutler's denial, the article further stated that “the big price tag on the Cooper purchase, and the ton of debt Eaton must take on to swing the deal, leave open the possibility that Eaton will need to sell pieces of its past as it pursues its future,” referring to the context of Eaton's transformation from a vehicle to an electrical parts-focused company. ¶ 101. Thus, this article shows that Defendants' denials were half-truths that created a materially misleading impression, i.e. left “open the possibility” of divesting the business during the Class Period, when Defendants knew but concealed that Eaton was actually constrained from doing so by the adverse tax consequences of the Merger. ¶ 103. See In re Salix Pharm., Ltd., 2016 WL 1629341, at *11 (S.D.N.Y. Apr. 22, 2016) (“The Court's reading of [defendants'] statements is bolstered by [ ] allegations regarding public comments made by analysts after the conference calls.”).

Likewise, new allegations from a July 14, 2014 Morgan Stanley report highlighted how “management has stated that while the Cooper transaction does not have any covenants that prevent it from taking any further strategic actions, it currently has no plans,” concluding these statements maintained the “possibility of a Vehicle spin . . . [that] could be a powerful catalyst for” Eaton's stock price; hence, it “reiterate[d] ETN as one of [its] top-picks.” ¶ 159. This further shows that the market wrongly believed that Eaton could do this divestiture and reasonably understood Defendants' denials as only downplaying the spin-off currently. That is far from reducing the probability to “zero” during the Class Period. Def. Br. at 7-8. The report also stated that “we have fielded more questions from investors regarding a potential spin of its Vehicle business” after Eaton settled the Meritor case, which was “widely viewed as a major barrier to any potential strategic actions around ETN's Vehicle business.” This new statement shows the tremendous investor focus on this subject during the Class Period, even after Defendants' denials, and that “major barriers” to the Vehicle spin-off were considered highly important by analysts and investors.

Similarly, new allegations show that a July 15, 2014 Deutsche Bank report maintained its “buy” rating and raised its price target because “Eaton might ultimately separate the rest of its Vehicle business from the portfolio.” ¶ 160. The report confirmed that investor “focus on Vehicle [had] intensifie[d]” in recent months (notwithstanding Defendants' denials) following the Meritor settlement, such that “the path has been cleared for Eaton to monetize its Vehicle business.” This report and four other newly alleged analyst reports confirm that the market was unaware of any other obstacles that could block the path for this Vehicle divestiture and that such information was material. See ¶¶ 141-43 & 158; see also Pls. Ex. A (April 13, 2013 MKM report: “a settlement [of Meritor lawsuit] would also clear the way for an investor-anticipated Vehicle spin”); Pls. Ex. B (February 26, 2014 J.P. Morgan report: “[i]nvestors will likely be focused on the [Meritor] suit and whether it prevents a potential spin-off of the Vehicle segment.”).⁴

i. Analyst Reactions After the Corrective Disclosure Further Evidence Materiality

Additionally, “sharp criticism from industry analysts after [the corrective disclosure] further indicates the weight given to [the omitted] information.” Scholastic, 252 F.3d at 76. Here, allegations of analysts' critical reactions to Defendants' disclosures at the end of the Class Period, as strengthened by additional new statements in the SAC from analyst reports, reinforce the materiality of this information. ¶¶ 174-86. For example, new statements from a July 29, 2014 KeyBanc report show that the market understood Defendants' disclosure of the “prohibition” on tax-free spin-offs to mean that Eaton was economically unable to divest this business until 2017, not that it was simply expensive: “the prospect of a business spin-out [ ] clearly remains off the table through 2017.” ¶ 179. Similarly, a July 30, 2014 Wells Fargo report discussed the 8% “sell-off” upon this “bad news,” which — in another new allegation — the analyst specifically described as the “announced inability to spin-off businesses for the next five years” — i.e. the tax issue was prohibitive. ¶ 181.

ii. The Large Stock Drop Also Shows Materiality

The Second Circuit recently reaffirmed that “[t]he importance of this information to investors is illustrated by the fact that, when it was revealed,” its “stock dropped.” Ma, 2017 WL 6003340, at *2 (reversing dismissal where “the eventual market reaction to [the] revelation of the information that was concealed,” a 13% stock drop over two days, showed that “[t]he alleged omitted facts constituted material information of substantial interest to prospective investors”). This Court, too, has recognized as much. Fresno Cty. Emps.' Ret. Ass'n v. comScore, 2017 WL 3261609, at *15 (S.D.N.Y. July 28, 2017) (“comScore's significant stock drop further supports [ ] materiality”).

Here, the SAC adds a new allegation that Eaton's 8% stock drop after its disclosure, representing a market capitalization loss of $3 billion, was the Company's largest for the prior 6 years, showing just how significant this news was. ¶ 173. This fact also supports materiality.

iii. Defendants' Counterarguments Regarding These Analyst and News Reports Fail

Defendants concede that the FAC established that “analysts were interested in a potential spin-off,” but argue that the SAC's new statements from analyst and other reports add nothing, because they acknowledged that Eaton denied current interest in such a divestiture. Def. Br. at 3-5.

This argument misses the point — the market still viewed the divestiture as possible and material, despite recognizing Defendants' (often hedged) denials. These additional allegations strengthen Plaintiff's argument that throughout the Class Period analysts and investors unanimously believed that Eaton could greatly enhance its value by undertaking a tax-free spin-off of its Vehicle division, and that they believed the Company had the ability to do so. In total, the SAC cites at least 16 analysts and business writers who all shared that view. ¶¶ 58, 67, 73, 91, 94, 98, 99, 114, 115, 144, 147, 149, 152, 157, 158. That they all had the same misunderstanding about Eaton's continued, unconstrained ability to divest the business during the Class Period further shows that Defendants' misstatements and omissions, including their half-true denials, created that false impression. See Salix, 2016 WL 1629341, at *11 (“Although a listener's misunderstanding of what was said does not, on its own, make a statement misleading, the allegation that several different analysts understood Defendants as describing current inventory levels provides support for the [ ] conclusion that Defendants' statements are reasonably interpreted as such.”).

Defendants have no response. They do not cite a single analyst who held a contrary view, and Plaintiff is not aware of any. And they do not offer any innocent explanation of how all of the analysts came to the wrong conclusion about Eaton's ability to divest its Vehicle business on a tax-free basis other than to repeatedly state that the analysts were aware of Defendants' denials of any current intention to sell the business.

iv. Defendants' Statements Regarding Their Continued, Unconstrained Ability to Divest the Vehicle Business Were Materially Misleading

Unlike the analysts and investors during the Class Period, Defendants knew “all along” (¶ 168) that (i) as a result of Eaton's merger with Cooper, a tax-free divestiture of Eaton's Vehicle business was not legally possible, and (ii) a taxable divestiture was not economically feasible. ¶¶ 164-70. But Defendants were very careful in their answers to at least seven direct questions on this subject to not tell the full truth. ¶¶ 188, 190, 201, 204, 207, 209, & 215. When questioned whether there were any “constrain[ts]” (¶ 209) on their “ability” to divest (¶ 204), including specifically for “tax”-related reasons (¶¶ 190, 209), rather than tell the truth (which would have caused a substantial drop in Eaton's stock price, as evidenced by the steep 8% drop discussed above), Defendants repeatedly denied or spun half-truths about Eaton's tax status and having no current interest in divesting the Vehicle business. Thus, they implied that such a divestiture was currently feasible. For instance, analysts asked:

• “Are you precluded by any element of the tax structure of the deal [the Merger] to spin off the truck and automotive part at any time?” (¶ 190)

• “There is a lot of talk of the ability to divest businesses that you may not necessarily think are core any more. . . . what is the thought in terms of the ability if you decided to sell some of those businesses? Is it a spin out?” (¶ 204)

• “Anything about the way the tax structure has formed over time [after the Merger] would constrain things you might do strategically, whether that were a larger-scale divestiture or anything else?” (¶ 209)

See also ¶ 201. Defendants repeatedly answered “No,” (¶¶ 201, 209), stating there were no such “restrictions” (¶ 201), “nothing . . . prevent[ed]” (¶¶ 190, 204) Eaton from doing this, or that it “can act” (¶ 215) when it wanted to. They added only that they had no current intent or plans to do so.

Thus, Plaintiff is not “putting words in defendants' mouths” in stating that Defendants misrepresented Eaton's “continued, unconstrained ability” to spin-off the Vehicle business. Def. Br. at 9-10. Defendants omit virtually all of the analyst questions above — including, notably, that they were specifically asked if “tax” issues “or anything else” “constrain” (¶ 209) Eaton's “ability” to do it (¶ 204), not its current plans. Even if Defendants did not repeat those exact words in responding, their answers adopted them. Moreover, Defendants' interpretation of the word “prevent” as meaning solely a complete prohibition — to explain how Cutler's response (¶ 201) was “fully accurate” (Def. Br. at 9-10) — is contrary to the plain meaning of that word, which is defined as “to stop from happening” or “to hinder or impede.” Black's Law Dictionary (10th ed. 2014). Even if there were no regulation or a covenant in the Merger's structure that directly stopped such a divestiture, Eaton was at least hindered or impeded from doing so by the resulting high tax liability.

In any event, regardless of their literal truth, Defendants' statements were materially misleading because of the undisclosed, material, five-year constraint on Eaton's ability to execute a tax-free spin-off. Thus, Eaton's theoretical “right to [engage in a transaction] was illusory and [ ] the representations of it . . . were misleading . . . despite their literal meaning.” McMahan & Co. v. Wherehouse Entm't, Inc., 900 F.2d 576, 580-81 (2d Cir. 1990). The Second Circuit has made clear that literal truth is not the standard for falsity. Id.; see also Operating Local 649 Annuity Tr. Fund v. Smith Barney Fund Mgmt. LLC, 595 F.3d 86, 92 (2d Cir. 2010) (“The veracity of a statement or omission is measured not by its literal truth, but by its ability to accurately inform rather than mislead.”); Vivendi, 838 F.3d at 240 (“half-truths [are] literally true statements that create a materially misleading impression . . . by virtue of what they omit to disclose”). “It is now quite clear that a half truth is as bad as an outright lie.” 2 Louis Loss, Joel Seligman, & Troy Paredes, Fundamentals of Securities Regulation, at 1263 (6th ed. 2011); see also id. at 1268 (“Each individual piece of information at issue needs to be evaluated in the context of the overall impression made by defendants' statements.”).

Here, Defendants chose to answer the analysts' specific questions, triggering their duty to disclose the material tax constraint. See Meyer v. Jinkosolar Holdings Co., 761 F.3d 245, 250 (2d Cir. 2014) (“Even when there is no existing independent duty to disclose information, once a company speaks on an issue or topic, there is a duty to tell the whole truth.”). Thus, Defendants' insistence that they had “'no duty to correct or verify rumors'” is a red herring. Def. Br. at 8, n.4 (quoting Order at 23). As a leading securities treatise explains:

Questions concerning the need to disclose information may [ ] arise when [ ] officers are questioned by . . . securities analysts. In such situations, . . . [n]o comment is the only safe harbor (other than giving a full and honest disclosure), as any other response will trigger the highly factual materiality inquiry. . . . [M]anagement should [not] be allowed to respond to inquiries with 'white lies.'

3 Thomas Lee Hazen, Treatise on the Law of Securities Regulation, § 12:68 (7th ed. 2016); see also Corp. Prop. Assocs. 14 Inc. v. CHR Holding Corp., 2008 WL 963048, at *1 (Del. Ch. Apr. 10, 2008) (“The maxim silence is golden . . . are truly words of wisdom when you are not under a duty to speak and someone asks you a question that potentially touches upon information that you would rather not divulge.”). Defendants' “white lies” here violated their disclosure obligations.

v. Defendants' Other Arguments Against Materiality Are Also Unavailing

Defendants assert that the SAC fails the materiality test for “contingent events” because it “offer[s] no facts relevant to the Court's holding: that the 'indicated probability of such a spin-off was zero.'” Def. Br. at 7-8 (quoting Order at 21). This test asks courts to “balance[ ] both the indicated probability that the [contingent] event will occur and the anticipated magnitude of the event.” Order at 20. Defendants are wrong for three reasons.

1. Materiality Is a Fact-Specific Inquiry That Can Rarely Be Decided as a Matter of Law

First, “given the fact-specific nature” of materiality, “it will rarely be dispositive in a motion to dismiss.” Carpenters Pension Tr. Fund of St. Louis v. Barclays PLC, 750 F.3d 227, 235 (2d Cir. 2014). The Supreme Court has rejected any “bright-line rule” that “designates a single fact [ ] as always determinative of an inherently fact-specific finding such as materiality.” Basic Inc. v. Levinson, 485 U.S. 224, 236 (1988). On “a Rule 12(b)(6) motion, a complaint may not properly be dismissed . . . on the ground that the alleged misstatements or omissions are not material unless they are so obviously unimportant to a reasonable investor that reasonable minds could not differ.” Ganino v. Citizens Utilities Co., 228 F.3d 154, 162 (2d Cir. 2000). In particular, “materiality issues regarding contingent events rarely, if ever, are suitable for determination as a matter of law.” Hazen, § 12:67.

2. The Balancing Test for Materiality of Mergers and Contingent Events Is Inapplicable Here

Second, this test, which originated and is typically applied in the context of merger negotiations, is inapposite here. See ECF No. 56 (prior Opposition) at 18-19. In particular, this case concerns an undisclosed “prohibition” on tax-free spin-offs that existed and was known to Defendants during the Class Period. Thus, this tax constraint was an existing, known fact, rather than a future “contingent or speculative” “event[ ]” that may or may not happen. Basic, 485 U.S. at 238, 250; Castellano v. Young & Rubicam, Inc., 257 F.3d 171, 185 (2d Cir. 2001). Defendants admitted knowledge that a tax-free spin-off was “not possible” during the Class Period based on their “not [ ] simple analysis” which “several outside advisors corroborated”; they were, in Fearon's own words, “very certain.” ¶ 167. Accordingly, it was the materiality of this tax “prohibition” — the relevant information that was allegedly omitted — that must be evaluated. The SAC includes ample allegations, including those based on new analyst and news statements and Plaintiff's experts, demonstrating that such a tax constraint on what the market viewed as a highly beneficial divestiture, particularly given the context of Eaton's business shift from vehicle to electrical products, was “viewed by a reasonable investor as significantly altering the total mix of information available” — the general test for materiality. Castellano, 257 F.3d at 185.

3. Even Under This Test, the Omitted Information Was Not Immaterial as a Matter of Law

Third, even if this balancing test applies, Defendants ignore the new allegations showing that, in the market's eyes, Defendants' statements did not, in fact, reduce the probability of a divestiture to “zero.” By providing misleading responses to Defendants' questions about Eaton's “ability” to spin-off this business, Defendants left open the possibility that the divestiture still could occur during the Class Period, even if it was currently unlikely based on Defendants' denials.

Even a low-probability event is not necessarily immaterial as a matter of law because:

[T]here is no requirement that a transaction need be probable for negotiations [ ] regarding this transaction to be material. As materiality in such a circumstance is determined by considering both the probability of an event and its potential magnitude, a relatively improbable event of sufficient magnitude could potentially be material, since a factfinder might find it likely to have been viewed by a reasonable investor as significantly altering the total mix of information. . . .

Id. Given that divesting the Vehicle business here was an event of extremely high magnitude, as argued previously (ECF No. 56 at 19), the allegedly omitted information was material, particularly as supported by the SAC's new allegations. See Meyer, 761 F.3d at 251–52 (the materiality “requirement is not much of a barrier” where “[a]pplying the Basic formulation of measuring the importance of the event discounted by [its] probability . . . a trier of fact could find that . . . omitted facts [were] of substantial importance to investors.”); Hazen, § 12:67 (“relatively uncertain contingencies that would have a great impact on the company may be material”).

That the spin-off has not happened, as Defendants repeat, is meaningless because the tax constraint had been in effect until just eleven days ago. Moreover, Castellano specifically held that such a “hindsight” argument is improper. 257 F.3d at 185 (“The probability of a transaction occurring must be considered in light of the facts as they then existed at the time of the securities purchase, not with the hindsight knowledge that the transaction was or was not completed.”).

2. Defendants' Half-True Denials Created the False Impression that Eaton Was Not Constrained In Divesting Its Vehicle Business

The Court found that the FAC failed to adequately plead materiality or a duty to disclose because Defendants “made clear from the day the merger was announced that there were no plans to spin off Eaton's automotive business” by issuing a series of denials during the Class Period. Order at 22-23. The SAC addresses this holding by alleging that these denials are actionable as misleading half-truths because they created the materially misleading impression that Eaton could divest its Vehicle Business during the Class Period without any constraint. In reality, the Merger made tax-free spin-offs “not possible” for five years, rendering divestiture of the Vehicle business economically unfeasible given the resulting large tax liability. ¶¶ 164-70. See Vivendi, 838 F.3d at 240 (half-truths are “representations that state the truth only so far as it goes, while omitting critical qualifying information”). Eaton's denials of divestiture plans (often qualified) omitted the key fact that it could not do tax-free spin-offs for five years post-Merger, and are actionable half-truths.

3. Plaintiff's Experts Bolster the SAC's Materiality Allegations

The Court also found Defendants' statement not materially misleading because “[b]oth parties also agree it would have been possible under the tax code to complete the spin-off, but that it would not have been possible to complete the spin-off tax-free.” Def. Br. at 10. Defendants repeat this argument. Id. at 2, 4, 11, 12. The SAC addresses this issue through new allegations based on the analyses of Plaintiff's tax expert and investment banking expert.

a. Courts Frequently Consider Allegations Based on Expert Analyses in Ruling on a Motion to Dismiss

Defendants argue that these new expert allegations “are meaningless” because they “merely offer opinions based on a review of public information” and “'opinions cannot substitute for facts under the PSLRA.'” Def. Br. at 11 (citing City of Royal Oak Ret. Sys. v. Juniper Networks, Inc., 2013 WL 2156358, at *7 (N.D. Cal. May 17, 2013)).⁵ Defendants are wrong.

In In re Platinum and Palladium Antitrust Litig., as here, defendants argued that a complaint improperly relied on expert opinions, which “the Court may not consider . . . at the motion to dismiss stage.” 2017 WL 1169626, at *13 n.9 (S.D.N.Y. Mar. 28, 2017). Judge Woods rejected this argument because “[t]he Second Circuit and district courts in this circuit routinely rely on expert [ ] analyses contained in pleadings,” explaining that “[t]here is a difference between expert opinions, which the Court does not rely on, and allegations based on those opinions, which the Court may rely on . . . in analyzing whether Plaintiffs have stated a claim.” Id. (collecting cases). This is equally true in PSLRA cases. E.g., Barclays, 750 F.3d at 234 n.8 (relying on “an analysis conducted by an 'economics expert in loss causation'” in a PSLRA case); In re Resonant Inc. Sec. Litig., 2016 WL 6603953, at *2 (C.D. Cal. Sept. 6, 2016) (“the admissibility of expert testimony to satisfy the PSLRA's heightened pleading requirements has been clearly resolved by the Ninth Circuit”).

Accordingly, Defendants' attempt to discredit the SAC's expert allegations fails.

b. Plaintiff's Experts Show that a Taxable Sale of the Vehicle Business Was Economically Unworkable, Not Just Expensive

Plaintiff's tax expert, Mr. Baran, analyzed the expected tax liability on a taxable sale of Eaton's Vehicle business. Based thereon, the SAC alleges that the tax liability would have been up to 35% (corroborating a February 5, 2013 Jefferies report that gave the same figure, ¶¶ 67-68), or more than $2 billion given the valuation of that business at the time. ¶¶ 74-76. It shows that the adverse tax consequences of a taxable sale were not “hypothetical,” but substantial, rendering the divestiture economically unworkable. As Defendants admitted, a taxable spin-off would be taxed even “higher than just an asset sale.” ¶ 170.

The SAC further alleges that Plaintiff's investment banking expert, Mr. Miller, verified a February 5, 2013 Jefferies report showing that a taxable sale of the Vehicle business, as opposed to a tax-free spin-off, reduced the total value of Eaton by 13% (or $3.5 billion in market capitalization). ¶¶ 67-72. Further, Mr. Miller conducted his own analysis that corroborated the Jefferies analysis and concluded that a taxable sale of this business would have effectively reduced the total value of the Company by approximately 16.7% ($4.6 billion in market capitalization), compared to its value with a tax-free spin-off. ¶¶ 80-81. Mr. Miller further opined that no reasonable investment banker would have recommended a taxable sale because it would have resulted in a substantial decrease in shareholder value. ¶ 84. Thus, he concluded that a taxable sale would not have been economically feasible. Id. Even though a taxable sale remained theoretically possible, investors and analysts did not consider this a viable option, particularly given Eaton's financial position during this time period such that it did not need a fire sale for a cash infusion. See ECF No. 54-4 (transcript of Eaton's February 5, 2013 earnings call announcing profitability and “[v]ery strong cash flow”). These new expert allegations further show the economic unfeasibility of such a taxed divestiture, and, therefore, the materiality of such omitted information.⁶

4. The SAC Alleges a Strong Inference of Scienter

The Court held that the FAC did not establish scienter because (i) the statements alleged were “not inconsistent” with Defendants' July 29, 2014 admissions, (ii) the FAC pled “no reason for any executive to be dishonest,” and (iii) Cutler and Fearon may not have “thought they had any obligation to disclose the possible tax consequences of a theoretical spin-off that Eaton had no plans to make. . . .” Order at 26, n.3, 29 & 33. Defendants claim the SAC “does not add a single new scienter allegation.” Def. Br. at 13. But it does.

a. Neither Willfulness Nor Motive Is Required to Plead Scienter

In this Circuit, scienter may be pled by alleging facts showing “that defendants had both motive and opportunity to commit fraud” or “conscious misbehavior or recklessness.” Novak v. Kosaks, 216 F.3d 300, 307 (2d Cir. 2000). “[S]ecurities fraud claims typically have sufficed to state a claim based on recklessness when they have specifically alleged defendants' knowledge of facts or access to information contradicting their public statements.” Id. at 308. See also 5C Arnold S. Jacobs, Disclosure and Remedies Under Securities Laws § 12:77 (2017) (“A defendant's actions constitute knowing conduct if he knows the truth concerning the misrepresented facts or is aware of the omitted data when the violation takes place. . . . Knowing conduct also includes making a statement the defendant knows is wrong.”). Thus, Plaintiff is not required to plead willful misconduct; rather, the SAC can establish scienter by alleging that Defendants knew but left out a material fact contrary to their statements — here, the prohibition on tax-free spin-offs. Plaintiff is also not required to plead motive. See In re Ashanti Goldfields Sec. Litig., 2004 WL 626810, at *4 (E.D.N.Y. Mar. 30, 2004) (where they “attempt to show scienter under [ ] conscious misbehavior or recklessness. . . . plaintiffs are not required to show motive for fraud . . . [or] intent to defraud”).

b. The SAC Pleads a New Admission that Bolsters Scienter

The SAC satisfies the Second Circuit's knowledge or recklessness standard for scienter. It alleges an additional admission by Fearon on July 29, 2014 that was directly inconsistent with the alleged misstatements. Specifically, Fearon acknowledged that a taxable divestiture was “difficult to make work economically” (¶ 170) because it would be taxed even “higher than just an asset sale for some complex reasons.” Id. This augments Cutler's admissions, made on the same earnings call, that the “limitation [on tax-free spin-offs] means that any spin[-off] would result in a very significant tax liability” and “this five year kind of prohibition . . . means that there is not really a compelling economic rationale for further business portfolio transformation.” ¶ 164. Fearon added, “it's a conclusion our team came to” based on “not a simple analysis, but they came to it and then several outside advisors corroborated that, so we're very certain that that analysis is accurate.” ¶ 167. In other words, at the end of the Class Period, Defendants finally admitted that a sale of Eaton's Vehicle business was not economically feasible.

These admissions establish that the tax constraint was so substantial as to make a sale of the Vehicle business economically unworkable, rather than simply more expensive; hence, they called it a “five year . . . prohibition.” ¶ 164. Moreover, Cutler further admitted: “It's not new knowledge. We've been well aware of this all along.” ¶ 168. See Yourish v. Cal. Amplifier, 191 F.3d 983, 996 (9th Cir. 1999) (“I knew it all along” admission shows that statement was knowingly false when made). This alone adequately pleads scienter because Defendants knew material facts — the tax-free spin-off “prohibition” — “suggesting that their public statements were not accurate.” Novak, 216 F.3d at 311.

Second, the FAC alleged that at least 15 analysts and business writers (in addition to investors) had the same incorrect belief during the Class Period: that Eaton had the ability to do a tax-free spin-off after the Merger (and wrote or spoke about it on 29 instances). The SAC cites 5 more instances, by 1 additional writer. ¶¶ 136, 141-43, & 158. It also alleges five new half-truths told by Defendants (¶¶ 190, 204, 207, 213, & 215) that fostered the market's incorrect belief.

Where one or two analysts come to an incorrect understanding based on one or two of Defendants' statements, it could be argued that the analysts misinterpreted those statements, or Defendants misspoke. But as the number of well-respected analysts who all held the same incorrect understanding rises, and the number of occasions on which Defendants spoke on the subject rises, the most compelling inference is that Defendants knew the facts spoken were false or they had misled analysts. See Inst. Inv'rs Grp. v. Avaya, Inc., 564 F.3d 242, 269-70 (3d Cir. 2009) (“the most powerful evidence of scienter” was that defendant consistently “denied the [matter at issue] in response to repeated questions about [it] by analysts.”).⁷

Further, Defendants' ten misleading statements on this subject, over an 18-month time period (May 21, 2012 – November 13, 2013), undermines their argument (and the Court's prior conclusion) that “'[t]he compelling opposing inference is that neither Cutler nor Fearon thought that they had any obligation to disclose” such information. Def. Br. at 13 (quoting Order at 33). Indeed, the fact that Defendants finally disclosed this information in response to continuing inquiries from investors and analysts evidences their knowledge that their prior responses misled investors. E.g., ¶ 179 (new allegation based on July 29, 2014 KeyBanc report stating: “We believe the Company clarified this issue in response to heightened attention paid recently by investors and the Street on the prospect of a business spin-out, which clearly remains off the table through 2017.”).

Therefore, the strongest inference from the unanimous incorrect understanding of the 16 analysts and business writers quoted in the SAC is that they incorrectly understood that a tax-free divesture was still possible given Defendants' repeated statements. This pattern of conduct over time indicates a strong inference of scienter. The SAC makes that inference stronger by enlarging the pool of analysts and writers who came to the incorrect understanding and the number of alleged misstatements that contributed to that misunderstanding.

B. Plaintiff's Amendment of the Class Definition Eliminates the Argument that Relation Back Is Inapplicable Under Rule 15(c)(1)(C)

The Court held that “the CCAC's expansion of the class period as alleged in the original complaint . . . does not relate back to the original complaint” because this expansion added new “parties” within the meaning of Rule 15(c)(1)(C), and Plaintiff did not show that its “failure to include” them in the initial complaint was “the result of a mistake in identity.” Order at 15-16. In response, Plaintiff amended the class definition so that it no longer adds new parties. ¶ 1 & n.1. This fully addresses the Court's relation-back concern under Rule 15(c)(1)(C).

Relying on Wilder v. News Corp., 2016 WL 5231819 (S.D.N.Y. Sept. 21, 2016) and Rule 15(c)(1)(B), Defendants argue that relation back is still impermissible. Def. Br. at 14-15. Not so.

1. The SAC Relates Back to the Initial Complaint Because It Fully Satisfies the Requirements of Rule 15(c)(1)(B)

Under Rule 15(c)(1)(B), an amended complaint “relates back” to the prior complaint if it “asserts a claim or defense that arose out of the conduct, transaction, or occurrence set out . . . in the original pleading.” In enacting Rule 15, the Supreme Court and Congress embraced a liberal approach to amendment and relation back. See 6 C. Wright & A. Miller, Fed. Prac. & Proc. Civ. § 1471 (3d ed.). “When a suit is filed in a federal court . . ., the defendant knows that the whole transaction described in it will be fully sifted, by amendment if need be.” Siegel v. Converters Transp., Inc., 714 F.2d 213, 216 (2d Cir. 1983) (Friendly, J., Oakes, J. Cardamone, J. per curiam).

Here, the November 13, 2013 misstatement (¶ 215) was pled as a misstatement in the Initial Complaint (ECF No. 1 at ¶ 26), and Misstatements No. 2, 5, & 6 (¶¶ 190, 201, & 204) were included in the factual allegations section of the Initial Complaint (ECF No. 1 at ¶¶ 21-23). The SAC's other misstatements are all directly related to the tax prohibition arising from the Merger, which is the precise “conduct, transaction or occurrence set out . . . in the original pleading.” Rule 15(c)(1)(B). Thus, the Initial Complaint described the exact conduct that Defendants now seek to excise.

As the Second Circuit has explained, “[u]nder Rule 15, 'the central inquiry is whether adequate notice of the matters raised in the amended pleading has been given to the opposing party within the statute of limitations by the general fact situation alleged in the original pleading.'” Slayton v. Am. Express Co., 460 F.3d 215, 228 (2d Cir. 2006) (quoting Stevelman v. Alias Research Inc., 174 F.3d 79, 86 (2d Cir. 1999)). Because the Initial Complaint gave Defendants the required adequate notice, the new allegations in the SAC relate back.⁸

Stevelman found relation back under this test, notwithstanding that the amended complaint, as here, alleged “a largely different set of alleged misstatements made by Defendants” and “encompasse[d] a different purported class period than his original fraud claim” (expanding it by “over seven months”). Brief for Defendants-Appellees, Stevelman v. Alias Research Inc., 1998 WL 35155442 (2d Cir. Apr. 8, 1998). The Second Circuit found that such amendments pled “the same transactions and conduct contained in the original allegations” because “the facts alleged in the original complaint clearly put [defendants] on notice as to the conduct and transactions at issue in this action.” Stevelman, 174 F.3d at 86-87.

Likewise, in Slayton, the Second Circuit held relation back to be appropriate despite defendants' arguments that the amended complaint alleged new misstatements and omissions. 460 F.3d at 221; see also Brief for Plaintiffs-Appellants, Slayton, 2004 WL 5251002 (2d Cir. Aug. 23, 2004) (stating that the amended complaint included “new allegations of additional false statements”). Slayton held that these new misstatements related back because they “ar[o]se out of the same set of operative facts,” regarding Amex's junk bond and CDO investments. 460 F.3d at 229. See also In re Gilat Satellite Networks, Ltd., 2005 WL 2277476, at *24-26 (E.D.N.Y. Sept. 19, 2005) (amendment expanding the class period by 12 months and adding 14 new misstatements related back); Teamsters Local 445 Freight Div. Pension Fund v. Bombardier Inc., 2005 WL 2148919, at *1 & *10 (S.D.N.Y. Sept. 6, 2005) (amendment to add misstatements, “expand the class . . . and enlarge the class period” related back under the “conduct, transaction, or occurrence” test).

Accordingly, because the SAC involves the same “general fact situation alleged in the original pleading,” it satisfies the “conduct, transaction or occurrence” test. Stevelman, 174 F.3d at 86.

2. Wilder Does Not Support Defendants' Argument Against Relation Back

Defendants rely on only one case, Wilder, in support of their view that relation back under Rule 15 is impermissible for a class defined to exclude any new putative parties. See Def. Br. at 14 (citing Wilder, 2016 WL 5231819, at *6).⁹ But in Wilder the class was not defined to exclude new parties. There, after Judge Gardephe dismissed plaintiffs' complaint expanding a class, plaintiffs moved for reconsideration instead of amending – invoking a higher standard that they failed to meet. Id. at *6-7. Specifically, they argued that the court committed “clear error” by not, on its own, dismissing only the “[n]ew” class members and allowing the original class members to proceed, even though plaintiffs had not requested such relief in their briefing on the motion to dismiss. Id. at *6.

In rejecting the argument, Wilder did not analyze the issue other than to cite a footnote in In re Refco, Inc. Sec. Litig. for the uncontroversial point that “[a] class period is delimited in order to identify the individuals who claim membership in the class, not to identify the conduct that injured them.” 503 F. Supp. 2d 611, 643 n.27 (S.D.N.Y. 2007). That analysis is of no consequence here, where the only persons being excluded are those whose claims this Court has held to be time-barred.

Thus, the two cases are different. Here, the SAC may expand the Class Period, so long as relation back under Rule 15(c)(1)(B) is satisfied. Moreover, that Plaintiff has expanded the class period without adding new putative class members whose claims have been dismissed is not unsupported. Cf. 7A C. Wright & A. Miller, Fed. Prac. & Proc. Civ. § 1760A (April 2016 update) (“[C]ourts also have considered whether the class definition must exclude anyone who does not have a viable claim.”). Indeed, courts routinely allow plaintiffs to narrow class definitions. E.g., Ross v. Warner, 80 F.R.D. 88 (S.D.N.Y. 1978) (permitting plaintiffs in an uncertified securities class action to narrow the class); McPhail v. First Command Fin. Planning, Inc., 247 F.R.D. 598 (S.D. Cal. 2007) (permitting plaintiffs to narrow the class definition in a securities class action where certain class members faced a statute of repose problem).

C. Defendants' Earlier Statements Provide Relevant Context to Show that Fearon's November 13, 2013 Statement Was Misleading

Regardless of whether the Court considers all of the alleged misstatements in the SAC or only the November 13, 2013 alleged misstatement (¶ 215), the motion to dismiss should be denied. While the November 13 statement is misleading by itself, its misleading nature becomes even more clear “when viewed in light of” Defendants' other, prior misstatements. See Richman v. Goldman Sachs Grp., 868 F. Supp. 2d 261, 279 n.9 (S.D.N.Y. 2012); Lapin v. Goldman Sachs Grp., 506 F. Supp. 2d 221, 236-37 (S.D.N.Y. 2006) (pre-class period statements may be considered “when they are relevant in determining whether defendants had a duty to make a corrective disclosure during the Class Period”). Here, the earlier misstatements show a pattern of misleading investors into thinking there were no constraints on Eaton's ability to divest, which can help plead scienter. See In re Enron Corp. Sec., Derivative & ERISA Litig., 235 F. Supp. 2d 549, 689 (S.D. Tex. 2002) (prior misconduct, though time-barred, was admissible as “evidence of a scheme and of scienter”).

IV. CONCLUSION

For the foregoing reasons, the Court should deny Defendants' Motion in its entirety.¹⁰

Dated: December 11, 2017

LABATON SUCHAROW LLP

By: Thomas A. Dubbs
Louis Gottlieb
Irina Vasilchenko

Jeffrey A. Dubbin
140 Broadway
New York, NY 10005
Telephone: (212) 907-0700
Facsimile: (212) 818-0477
Email: tdubbs@labaton.com
lgottlieb@labaton.com
ivasilchenko@labaton.com
jdubbin@labaton.com

Lead Counsel for the Class